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A Sales-Tax Holiday for California?
By Ron Roach

Is California about to get with the sales-tax holiday program?

Except for individual retailers or department store chains declaring their own tax-free sales, shoppers in California haven't experienced the joy of saving sales tax on their purchases as an official government-sanctioned "holiday" for the 68 years or so that the state has had a sales tax.

Now, for good (say Governor Gray Davis and retailers) or bad (says the so-called spending lobby - a.k.a. cities, counties and public employee unions), Californians may yet have their sales-tax holiday. The Democrat governor proposed a three-day tax holiday for the last weekend in August. If enacted, it would come with a number of limitations. It would apply to the state's 5.75 percent tax, but local governments could opt to join the party and not collect their sales taxes, which amount to 2 percent, more or less, depending on where you live.

The governor's one-time proposal would be limited to clothes and shoes (purchases up to $200) and computers (up to $1,000), including accessories. The governor's Department of Finance estimated that the state would lose $27 million in revenue, and, if all 58 counties, 400-plus cities and 40-something special tax districts partake, the additional revenue loss would amount to as much as $15 million. Tim Gage, the governor's finance director, admitted that the data was soft and those revenue estimates were more like (hopefully) good guesses. He also was unsure how much binge buying (where shoppers purchase taxable items) would occur to at least offset some of the revenue loss.

The object, according to the governor, is to help families as they make back-to-school purchases. However, any shopper - rich or poor - can benefit, as long as the purchases are on the approved list of clothes, shoes and computers. "This is a way to help families that are sending their children back to school. They have to buy clothes. It was a way to give them a break," the governor said.

According to an article in the November issue of Governing magazine, sales tax holidays can present a "slippery slope" as states and local governments battle each other over retail customers, luring them with promises of no sales taxes. Will sales tax weekends turn into weeks, then months?

Bruce Van Kleeck, a National Retail Federation vice president, was quoted by Governing as saying that a sales tax-free shopping period, which may provide a 5 percent saving, will cause greater shopper interest than a 20 percent discount sale. "There is just something about not paying taxes that consumers love," Mr. Van Kleeck said.

Sales tax holidays are on the rise, the magazine reported, starting with New York State in 1997. Texas and Florida were next, and four others have had holidays. The eighth state, Maryland, was scheduled to have its first holiday this year.

Twenty-one states considered the idea as of last year, Governing reported, and noted that "considering that there are four states without any sales tax on clothing, six with a limited sales tax and now eight with sales-tax holidays, there's clearly mounting pressure on the remaining states to either get on the bandwagon or be left behind."

Until Governor Davis went to bat for the idea this year, it was thought that supporters of a statewide sales tax holiday in California might be advised not to hold their breath for the day it would come.

Two bills were introduced in the 1999-2000 session of the California Legislature and neither measure came close to passage, even though the state - and many local governments - were wallowing in surplus tax dollars.

Ron Roach 
is communications director at Cal-Tax and editor of 
Cal-Tax Digest.

The Assembly in June 1999 passed (79-0) a watered-down "intent" bill, only to see it die without action in the Senate Revenue and Taxation Committee. This measure, AB 944 (Cardenas) was originally a 5 percent state sales tax exemption for all articles of clothing and footwear sold for $300 or less during certain weeks of the year. Local governments could continue collecting their sales taxes. Before passing the Assembly, this bill was watered down to become a mere statement of legislative intent to exempt clothes and shoes up to $100 during selected weeks in August.

The Assembly Appropriations Committee analysis estimated that a one-week exemption from paying the state's 5 percent general fund share of the sales tax would deprive state coffers of $40 million.

The other tax holiday bill was AB 1320 (Ashburn). It failed to pass a single legislative committee, suffering a May 1999 defeat in the Assembly Revenue and Taxation Committee. This bill would have exempted any item sold for less than $500 during the third week of January for 2000 through 2004, and would have applied to both state and local sales taxes. The tax relief would have amounted to hundreds of millions of dollars, and the exemption would have gone for purchases of diapers, television sets or alcoholic beverages.

According to an Assembly policy committee analysis, neither bill targeted the tax relief to prevent the wealthy from benefiting. Furthermore, comparisons with New York State, which has allowed tax-free weeks, were considered applies and oranges. Many New York State residents are within easy drives of neighboring states that may have lower tax rates. Californians, concentrated along the coast and inland valleys, are unlikely to drive to Arizona, Nevada or Oregon to buy a pair of shoes or jeans for school. (They will, however, for a carton of cigarettes.)

New York allowed its local governments the option to join the state in granting a holiday. Such an option in California, according to Assembly Revenue and Taxation Committee Consultant Eileen Roush's analysis, "would create an administrative nightmare for retailers, consumers, and the State Board of Equalization." The headache could be relieved somewhat, though, by making sure that the local option is countywide and not subject to the whims of 471 cities and 40 transactions and use tax districts, she wrote.

If the intent was to provide more affordable clothing to those in need, the approach suggested by a Democratic staff analyst was to provide welfare-like clothing grants to families with incomes below a certain level.

AB 944 was sponsored by the California Retailers Association; AB 1320 was supported by the California Manufacturers Association (now California Manufacturers and Technology Association). The California Tax Reform Association opposed both bills.

Governor Davis sees this as a win-win situation, helping the household budgets of Californians while also giving the economy a boost through a spike in retail sales. Governing reported that the states that have had these sales declare them "wildly successful."

Yet local governments are at least skeptical and concerned, and sometimes vehemently opposed, particularly if they see the trend snowballing into month-long sales or even permanent exemptions that will eat into their revenues and the states won't make up for their losses.

Governor Davis does not want the state picking up what locals might lose, while hoping they all opt in. That would provide a total savings of up to 8.25 percent (in San Francisco).

Naturally, the California Retailers Association is a booster of the Davis proposal. "When coupled with simultaneous retailer promotions, consumers could end up saving 25 to 30 percent on back-to-school clothes, and that's real money, especially for working families," CRA Vice President Pamela Williams told the San Diego Union-Tribune.

Pat Leary, fiscal analyst for the California State Association of Counties, said it could be "a total nightmare" if some localities join in the holiday and others do not, and some retailers decide to pay the local sales tax themselves, the newspaper reported.

Robert Horton, manager of Computer Warehouse in Sacramento, told The Sacramento Bee, "I think it's a shot in the arm for parents hard hit by recent economic setbacks. It will push people into the decision to buy and I think we'll see a spike (in sales) during that time."

Senate President Pro Tem John Burton, arguably the Legislature's most powerful member, expressed concern voiced by many liberals of the governor's own party, who may be the most difficult votes for the governor to get on this proposal. They haven't figured out how to prevent the wealthy from experiencing the tax holiday. Thus Senator Burton told The Los Angeles Times, "I'm not crazy about it."

However, in the Times report, Assembly Republican Leader Bill Campbell said he likes the idea, adding that it was a concept pushed by George W. Bush as Texas governor. Mr. Campbell said the new president "put it in place in 1999 and he made it permanent."

Assembly Member George Runner, the Republican's lead budget-writer in recent years and a graduate from local government ranks, noted that local governments would be forced to go along or be accused of raising taxes.

As Governing author Karen Ann Coburn summed up in her national perspective on the issue, a sales-tax holiday is a revenue loss or a consumer savings, depending on one's perspective. She wrote that it will be interesting to ponder, as neighboring locales and states jockey for advantage, whether the increasing popularity might eventually negate their effectiveness.